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September 28, 2000, Thursday


LENGTH: 4366 words


Chairman Bartlett, members of the Subcommittee, my name is Tony Raimondo, president and CEO of Behlen Mfg. Company, Columbus, Nebraska. I am here to testify on behalf of the National Association of Manufacturers. The NAM - 18 million people who make things in America is the nation's largest and oldest multi-industry trade association. The NAM represents 14,000 member companies (including 10,000 small and mid-sized manufacturers) and 350 member associations serving manufacturers and employees in every industrial sector and all 50 states. We're headquartered in Washington, D.C., and we have 10 additional offices across the country.

Specifically, I want to discuss the pro-growth and pro-worker issues that would benefit America's small business community and overall economy. America's economy has expanded impressively over the past 18 years, with only one relatively mild downturn in the entire period. At the NAM, we are proud of the disproportionately large contribution American manufacturers have made to that expansion. Coupled with the fiscal restraint of recent years, our booming economy has filled federal coffers beyond expectations and yielded the first federal budget surplus in more than a generation. The NAM believes that the federal tax code is the single largest current obstacle to economic growth. Federal tax laws need to be reformed and replaced with a pro-growth code. We realize that this effort is a daunting one. Consequently, until the code itself is fundamentally changed, we believe that certain pro-growth incentives need to be incorporated into an otherwise anti-growth tax code. For our small and mid-sized members, two of the most important incentives are repeal of the current estate and gift tax regime, sometimes known as the death tax, and a reduction in tax rates for S-corporations.

Death Tax Repeal

The importance of repealing the death tax to our small and mid-sized members is no surprise since they spend, on average, a staggering $52,000 a year on estate-tax planning. The time and money spent preparing for the death tax simply do not help a business in any other way. This diversion of valuable human and financial capital achieves absolutely no economically useful purpose. It does not increase productivity, expand the workforce or put new products on the shelf. A business pays this cost every year, not just at some uncertain future date when an even bigger bill comes due.

Our members would much prefer spending this money on new technology, business expansion and additional employees. Moreover, for about two- thirds of these companies, if the present owner died tomorrow, plans for expansion would be delayed, substantially curtailed or abandoned. For nearly one-third of our members, heirs would have to sell all or part of the business to pay the estate tax.

The death tax can be devastating to the transition between generations in a family-owned business. A Vermont Life insurance company study indicates that fewer than one in three family-owned companies survives to the next generation. The 55-percent estate tax rate does not allow much room to breathe. Very few businesses or business owners have that kind of liquidity, and almost no manufacturer does.

Currently there are some special estate-tax breaks on the books for small businesses, but qualifying for the family-owned business exclusion is difficult, if not impossible. Business owners must constantly monitor whether they meet the stringent ownership and participation requirements in the law, often a time-consuming and expensive endeavor. If the government determines after the fact, that is, after the owner's death, that these requirements have not been met, the full estate tax bill is due. Complete repeal of the death tax is the best solution for a pro-growth economy and for family-owned manufacturing companies and other small businesses that are creating jobs and a securing future for their employees.

S-Corporation Tax Rates

About 41 percent of our small and mid-sized members operate as S- corporations and tax-rate relief for S-corps is another tax law change that would have a positive impact on the ability of our small and mid- sized companies to grow. Congress originally created S-corps to offer small business owners an efficient and cost-effective way of doing business. Up until recently, lawmakers' efforts were extremely successful. For almost 40 years, S-corps contributed significantly to the country's economic growth. However, this positive trend was derailed in 1993, when the top individual tax rate was increased.

The 1993 Omnibus Budget Reconciliation Act raised the highest marginal tax rate for individuals from 31 percent to 39.6 percent - almost six percentage points higher than the comparable C-corp rate, which remained at 34 percent. Consequently, S-corps - as pass-through entities - now pay a higher tax rate than C-corps on income that is reinvested in their businesses.

The tax law changes enacted in 1993 represents a stark departure from Congress' strong support for S-corps, since they actually discourage small business owners from reinvesting earnings back into their companies. Income earned by similar sized C-corps that is retained and invested in the company is taxed at a maximum rate of 34 percent, while income reinvested in an S-corp is taxed at a maximum rate of 39.6 percent. To put it simply, S-corp owners now pay a higher tax than C-corps on money used to develop new products, enter new markets and hire additional employees.

Reducing the tax rate on S-corps would restore the benefits of S-corps and encourage entrepreneurs who are trying to grow their businesses.

Sales of Small Businesses: Restricting the Use of Seller Financing

Another tax-related issue that I wanted to bring to the attention of this committee is a provision enacted in late 1999, which prohibits the use of the installment method by accrual-basis taxpayers. This tax law change is having a significant negative impact on sales of small enterprises. In some cases, the sale prices of businesses have plummeted. Other sales have collapsed.

The installment method is used in approximately 9out of 10 small business sales for a variety of reasons, including the ability to spread the capital gains tax payment over the life of the sale. But the installment method has benefits beyond those related to taxes.

For sellers, it enables them to be more flexible in structuring the sale and to get a higher price for the business. For buyers, it allows them to purchase a business for which bank financing is unavailable. The installment method also ensures that the seller will continue to have a financial interest in the ongoing success of the business. For smaller enterprises that tend to have more of their total value attributed to good will, this assurance is often necessary for the sale to proceed.

The NAM supports reinstatement of the installment sales rule. H.R. 3081, which passed the House on March 9, 2000, would restore the ability of small businesses to use this rule. The Senate in July 2000, voted twice on amendments that would restore the installment sales provision, but these amendments were stripped out of the underlying legislation before final passage. We urge the Subcommittee to push for enactment of this provision in 2000.


Worker safety is one of the top concerns in my factory - and for the members of the NAM. I know all of my workers personally. They are like family to me and providing a safe work environment has been a team effort for many years. That said, the overall injury and illness rate is currently at its lowest level since the Bureau of Labor Statistics (BLS) began reporting this information in the 1970s. In spite of BLS data showing that musculoskeletal disorders, also known as MSDs, have declined by 24 percent since 1994, and despite the lack of consensus in the scientific and medical communities on the causes of MSDs, OSHA is moving aggressively forward with an ergonomics regulation and ignoring the intent of Congress.

Employers covered by OSHA's proposed rule - which was published in the Federal Register on Nov. 23, 1999 - would be responsible for taking measures to reduce all MSDs, including carpal tunnel syndrome and neck and back strains, by initiating and maintaining a basic ergonomics program once A SINGLE injury is reported in their facility. OSHA considers an injury "work related" if working conditions contributed to the injury, even if non-work factors contributed as well. Further, where typical workers' compensation rules currently provide two-thirds of an employee's pay while out of work, OSHA's rule will require workers to be paid at 90 percent of their pay if claiming an ergonomic injury. OSHA has, in effect, created a "most favored injury" status for ergonomics.

If covered, employers must set up an ergonomics program to control "work-related" MSDs that must include the following elements: (1) management leadership and employee participation; (2) hazard identification and information; (3) job hazard analysis and control; (4) training; (5) medical management; and (6) program evaluation. In October 1998, Congress approved $890,000 for the National Academy of Sciences (NAS) to conduct an independent, peer-reviewed analysis of the available science on MSDs. The NAM opposes the rule and urges OSHA to wait until all the evidence is in before moving forward.

Health-Care Liability

Health-care costs have jumped dramatically in the past decade. However, recent attempts at controlling costs, like the Dingell- Norwood Patients' Bill of Rights, will do nothing to make health insurance more affordable and accessible to those without coverage. Its mandates, bureaucratic involvement and lawsuit provisions will so raise costs that more and more Americans will find health insurance beyond their reach. By the Congressional Budget Office's own conservative estimates, the Patients' Bill of Rights will raise premium costs by as much as 4.1 percent per person, per year, and will increase the number of uninsured by nearly 2 million.

Worse, the bill's provision that allows employers to be sued for health-plan decisions will cause many employers - who voluntarily offer this important benefit - to drop insurance coverage for employees rather than risk exposure to a business-killing lawsuit. This is bad news for small businesses. Despite claims to the contrary, the Patients' Bill of Rights allows any employer who exercises "discretionary authority" over the company health plan to be sued. The truth is that basically all employers exercise such authority in managing their health plans, thereby leaving themselves open to potentially costly and draining litigation.

In an NAM survey of 1,000 companies of all sizes, nearly 40 percent indicated that they would drop health coverage for employees if exposed to lawsuits for health plan decisions. An additional 58 percent noted that such provisions cause "great concern." Nearly all expressed concern about health-care inflation, with three-quarters predicting cost increases of 10 percent or more in the absence of federal legislation. Yet, virtually all manufacturers currently provide health care benefits to employees (more than any other sector, including the government) and plan to continue doing so unless rising costs and the threat of lawsuits force them to drop benefits. Many others will be forced to reduce benefits or increase employee's share of coverage costs.

While it is true that there are cases where the health-care system clearly fails, it is also true that vast majority of Americans receive timely, high-quality health care when they need it. Poll after poll shows that some 90 percent of Americans are satisfied with their health-insurance plans and the government's own statistics show that 97 percent of all health care claims are paid without incident. Why, then, are we gripped by a "sky is falling" mentality towards health care recently? We shouldn't pass laws based on the 3 percent of Americans who dispute a health claim at the peril of the tens of millions of Americans who currently enjoy health care coverage. So what should we do? First, we need to provide for fair and timely independent review of disputed claims, expediting the process where appropriate, so that conflicts can be resolved efficiently and with as little delay as possible. The NAM has long believed that we should let market forces, not government mandates, rectify any problem areas within the health-care system.


Small manufacturers are also focused on aggressively expanding our markets overseas. With final passage of Permanent Normal Trade Relations (PNTR) with China, I wanted to highlight an important part of the debate that generally has been overlooked: Trade is vitally important to small American companies. Smaller companies will benefit from increased trade with China just as much as their larger counterparts. In fact, the U.S. Commerce Department has found that a startling 82 percent of all firms exporting to China are smaller companies, accounting for 35 percent of the dollar value of all U.S. exports to China.

Our experience at the NAM is that small and mid-sized exporting companies are aggressive in increasing their sales abroad. In 1989, roughly half of the NAM's small and mid-sized member companies said they export. Today, 80 percent fall into that category. In 1989, only 4 percent of those members earned more than 25 percent of their revenue from exporting and another 4 percent earned between 11 percent and 25 percent. Today, those percentages have more than doubled to 9 percent and 11 percent, respectively.

On the investment front, 13.8 percent of NAM's small and mid-sized member companies have a plant or other investment (acquisition, equity interest or joint venture) outside the United States. In 1995, only 9.2 percent had an overseas investment. That represents a 50 percent increase in just five years.

What has this dramatic trade and investment expansion meant to our economy? By any measure, the American economy and American workers have thrived in the past decade, due in no small part to trade.

* More than 12 million American workers' jobs are linked to trade. Unemployment has fallen to below 4 percent, its lowest level in over 30 years.

* Millions more work for companies that aren't directly involved in trade but for supply companies that are.

* 25 percent of the more than 12 million new jobs added in the U.S. economy during the 1990s has come from exports.

* Companies that do export create jobs almost 20 percent faster than non-exporting companies; they pay, on average, 15 percent more, provide benefits 40 percent higher and are 10 percent less likely to go out of business. * Over the past decade, exports have contributed 25 percent of America's overall economic growth.

* U.S. share of world exports has increased by 20 percent in the past 10 years. Trade -- exports and imports -- now represents about 25 percent of U.S. GDP. America is the world's largest exporter.

The fact is the health and wealth of small manufacturers and the well- being of the American worker are directly tied to the world economy. Ninety-six percent of the world's population live outside the United States. We can't afford to shut ourselves out of the world marketplace. To continue growth and prosperity, we must sell to the world, as well as to ourselves.

So how can we expand trade opportunities for small manufacturers? Significant foreign barriers to free and open commerce still remain in the world, particularly outside the industrial countries. The NAM believes the elimination of these impediments worldwide should be a top trade priority both for the White House and Capitol Hill. Manufactured goods comprise 90 percent of U.S. merchandise exports, and emphasis should be placed on removing barriers facing manufactured goods trade. The NAM urges an ambitious agenda of multilateral, regional, bilateral and sectoral approaches with the intention of obtaining as much new market access as possible.

Hours of Service

One regulation currently being promulgated gravely concerns manufacturers of all sizes, and that is the hours-of-service rule that the Department of Transportation published on May 2, 2000. For example, the proposal would place restrictions on the ability of drivers to operate commercial vehicles between midnight and 6:00 a.m. If finalized, this rule would severely disrupt just-in-time operations, particularly for those factories that operate 24 hours a day. The proposed final rule is deficient in its analysis of trade- offs, or so-called substitution risks.

For example, it does not take into account that there already is a shortage of qualified truck drivers. Are deliveries to be scaled back if they were to occur before 6:00 a.m., or will less-qualified drivers be hired? If it is the latter, then the DOT should have considered the well-known fact that most accidents involving trucks occur with less- experienced drivers - yet it failed to do so. Another trade-off not considered by the DOT is clean-air attainment. If replacement drivers cannot be found for pre-6:00 a.m. shipments, then those trucks would be forced into congested rush hours. In addition to the safety implications, what is the effect on clean air goals of trucks belching exhaust while idling in stalled traffic? This rule is a prime example of where Rep. Sue Kelly's proposal to authorize the General Accounting Office to scrutinize the promulgation of rules early in the process would be helpful. While I am not a regulatory expert, I understand that many people who are have expressed the opinion that this rule never should have been returned for publication from the Office of Management and Budget. Legal Reform

Small businesses - and small manufacturers in particular - have been very disappointed that legal reform measures have not been enacted into law. We appreciate, however, that the House has forwarded to the Senate H.R. 1875, the Interstate Class Action Jurisdiction Act; H.R. 2005, the Workplace Goods Job Growth and Competitiveness Act; and H.R. 2366, the Small Business Liability Reform Act. H.R. 1875 would allow nationwide class-action lawsuits to be removed to federal court where there is diversity of citizenship between the parties; H.R. 2005 would establish an 18-year statute of repose for workplace, capital goods; and H.R. 366 would establish a national standard of clear and convincing evidence before punitive damages could be awarded against firms with fewer than 25 full-time employees, and caps these damages at the lesser of three times compensatory damages or $250,000. H.R. 2366 also protects product sellers and renters from liability simply for being in the chain of distribution or for owning the product. In the current tort system, smaller businesses face the potential of bankruptcy with even one frivolous lawsuit that receives a favorable jury award. These measures would help to level the playing field.

Regulatory Improvement

As with legal reform, smaller businesses have been frustrated with Congress inability to pass any regulatory improvement measures. Again, as with legal reform, the NAM recognizes that the House has done its part by sending to the Senate H.R. 350, the Mandates Information Act of 1999; H.R. 391, the Small Business Paperwork Reduction Act Amendment of 1999; and H.R. 1074, the Regulatory Right- to-Know Act. H.R. 350 would allow a point of order against an unfunded mandate of $100 million or more on the private sector; H.R. 391 would allow a waiver for most first-time, technical paperwork violations that cause no harm; and H.R. 1074 would require the Office of Management and Budget to provide a yearly accounting of the costs and benefits of federal regulatory programs.

Small manufacturers also want to thank Rep. Sue Kelly for her hard work in support of H.R. 4924, the Truth in Regulating Act, which would establish an office within the General Accounting Office to promote better congressional oversight and accountability in the promulgation of regulations. As note above, it would have been helpful to have this office to analyze the proposed DOT hours-of-service rulemaking. (GAO has issued a limited report, but it could have been even more effective had the provisions of H.R. 4924 been in effect.) The NAM - and particularly its small manufacturers - hopes that any or all of these measures will be forwarded to the President, since the burden of regulatory compliance falls disproportionately on smaller businesses.

EPA Avalanche Coming Through the Backdoor

Small manufacturers care about the environment. We live, work and are raising our children in the same community. Clear air and water are fundamental to the people of Columbus, Nebraska, and to our employees. So is fair and open government. However, according to an Aug. 25, 2000, Washington Post article, "the Clinton Administration is working feverishly to issue a host of new regulations supported by environmentalists and other liberal-leaning groups but opposed by many business and industry organizations." The article cites the White House's determination to circumvent the rulemaking and legislative approval processes in order to accomplish its regulatory goals. Especially enthusiastic is the Environmental Protection Agency (EPA), with a reported 67 regulatory actions expected before this Administrations January exit. The NAM is seeking this list from EPA through a Freedom of Information Act (FOIA) request submitted on August 28, 2000.

This list manifests the combined effects of two serious problems of Administrative excess: 1) the now routine (and bipartisan) "midnight" rulemaking rush as a President's term draws to a close; and 2) the Administration's increasingly serious efforts to promulgate rules without using the notice-and-comment protections required under the Administrative Procedures Act (APA). The negative synergy of these two trends disrupts the regulatory process and creates uncertainty within the regulated communities.

The EPA's "backdoor rulemaking," or the practice of pushing through policy objectives under the guise of guidances and interpretations without proper administrative procedures, has become commonplace during the past year. It is faster (no proposals or notices) and easier (no comments to address or analyses required by law or executive order such as small business impact, cost/benefit analysis or unfunded mandate impacts). For example, in December 1999, the EPA published an interim guidance on air emissions under the CERCLA, which purported to interpret a liability provision without express or implied authority from Congress. The EPA followed a flawed process, clearly in violation of the APA, by issuing the guidance without responding to industry comments in related rulemakings.

Another example involves the EPA's controversial new source review (NSR) program, which requires major stationary sources to undergo review for environmental controls if the source builds new plants or makes "non-routine" changes to existing operations resulting in significant increases in emissions. Previously, the EPA unilaterally changed the definition of "routine maintenance and repairs" under the long-standing NSR regulation, without a rulemaking or guidance, through an "enforcement alert" on its Web site. Now, the EPA may be rushing to promulgate an unsound NSR rule by the end of this year. In a related area, the EPA's plan to change a New Source Performance Standard (NSPS) regulatory definition through "binding" interpretation was met with resistance by several industry associations, including the NAM.

The next few months promise to be busy, as the EPA gears up for its last push to regulate, guide and enforce. Michael Baroody, NAM's senior vice president, policy, communications and public affairs, summed it up best in his February 2000 testimony before the House Subcommittee on National Economic Growth, Natural Resources and Regulatory Affairs. "One has the sense that the Administration, perhaps having gotten in its final year an intimation of its own mortality, is in a bit of a rush to make policy by Administrative fiat where it has failed to do so by legislative means or by following the regular regulatory order." The NAM will strive in Congress, in the courts and with the next Administration to protect economic growth and manufacturers' competitiveness from EPA's zealous - and often illegal - policy-making through the backdoor.

Energy Supply Concerns

Small manufacturers are also deeply concerned about the recent media coverage concerning the spike in energy prices. On August 17, NAM released its "Statement of Concern on Energy Supply Policies." The statement focused on the need for the federal government to pay more attention to crafting policies that would encourage - rather than discourage - adequate energy supplies at competitive prices over the long term. The statement, which was reported in several trade publications, developed as a result of a number of NAM member companies making the NAM staff aware of their concerns and experiences with spikes in prices of natural gas, electricity and petroleum over the past year.

The NAM will work actively with this Administration and Congress in the time remaining, and with the presidential and congressional candidates to urge them to attend to the seriousness of these problems and the need for prompt action to meet these concerns.


I would like to thank Chairman Bartlett and the Subcommittee for the opportunity to discuss issues concerning small business on behalf of the National Association of Manufacturers. We hope that our recommendations to best promote and sustain an enterprise-friendly economy for small manufacturers are helpful and we look forward to working with the Congress on these various issues. Our list of concerns is lengthy, but we are up to the task to work with Congress and the Administration to encourage economic growth for our nation's small businesses - particularly in the manufacturing sector.


LOAD-DATE: September 30, 2000

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